Democratic sweep, interest rate sensitivity, and reflation Democratic sweep, interest rate sensitivity, and reflation Democratic sweep, interest rate sensitivity, and reflation

Democratic sweep, interest rate sensitivity, and reflation

Equities 7 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  The Democrats have most likely secured two additional Senate seats in the Georgia runoffs giving the party a Congress majority with the tie breaker vote from the Vice President elect. This changes the macroeconomic outlook quite a bit which is also evident in today's session with interest rate climbing together with inflation expectations, US technology stocks adjusting lower to potential technology regulation and higher interest rates. The commodity sector is responding positively to the reflation trade momentum and we show how rising inflation have historically been positive for the commodity sector.

While the Wall Street Journal is still calling the Ossoff (D) vs Perdue (R) Senate runoff seat too close to call, while the Warnock (D) won the other seat, others have already said that the lean in the still to count mail-in votes is typically in favour of Democrats and thus the Democrats have most likely got a sweep for a 50:50 tie in the Senate with Vice President elect Kamala Harris deciding in case of a tie. The market seems to agree with a Democratic sweep scenario pushing the US 10-year yield to 1.02%, the highest level since March 2020, as the market is pricing more stimulus this year to combat the economic fallout from the Covid-19 pandemic. More fiscal stimulus with the implicit goal of restoring the unemployment level to pre Covid-19 level will ensure strong demand in the economy and help underpin higher inflation rate.

Source: Bloomberg

Nasdaq 100 is more rate sensitive in the short-term

The market is also clearly pricing in a Democratic majority in technology stocks with the Nasdaq 100 futures down 2% as the “Blue wave” scenario opens up a path for more technology regulation, wealth tax, higher corporate tax rate, more subsidies to green energy technologies and more stimulus which could push rates higher and thus negatively impact rate sensitive assets such as growth stocks, SPACs and private equity. As we said on our morning Saxo Market Call podcast the 12,500 level is likely a psychologically important support level that if broken could trigger further selling in US technology stocks.

Source: Saxo Group

The interest rate sensitivity will suddenly with the US 10-year yield above 1% begin to be a topic discussed on Wall Street. Here is some simple math to understand the concept. Nasdaq 100 is currently valued at 3% free cash flow yield whereas the S&P 500 is valued at 4.1% free cash flow yield. The free cash flow yield on equities spread to the global corporate investment grade yield has been quite stable the past 2 years. Assuming same spread a 100 basis points move in the US 10-year yield and assuming unchanged free cash flow would lead to 25% decline in Nasdaq 100. As the S&P 500 has financials that benefit from rising interest rates the spread would likely only move 0.7%-point higher leading to a 15% decline in the S&P 500. Offsetting these declines is of course the relationship that rising rates come with higher growth and thus the decline is likely not as dramatic. Also, the Nasdaq 100 is growing free cash flow much faster than the S&P 500 which means the difference would be smaller than our simple case. But nevertheless, it shows how rate sensitivity works and why Nasdaq 100 is more sensitive in the short-term. The most sensitive segment is of course highly valued growth stocks with negative free cash flows.

Commodity sector does well under rising inflation rate

This Monday we presented our Saxo Commodity Sector basket highlighting 40 stocks that provide a broad exposure to the commodity sector across four industries such as agriculture, chemicals, energy, and metals & mining. The entire sector is part of the reflation trade that will undoubtedly get more fuel from the Democratic majority in the US Congress. With the NY Fed Underlying Inflation Gauge Index (measuring both offline and online prices), China PPI Index y/y, and ISM Manufacturing Prices Paid all pointing towards higher inflation this reflation theme can no longer be questioned. The chart below shows the Saxo Commodity Sector basket excess monthly return in % over MSCI World against monthly %-points changes in the NY Fed Underlying Inflation Gauge Index. While rising or falling inflation does not perfectly explain the variation in commodity sector excess return it does have some weak impact. When the monthly change in inflation rate is positive the average excess return is 3.1% and when the inflation rate is falling the excess return is 0.3%.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992